I’ve noticed a rise in dental customers wanting to own investment properties within a company.
These companies are often referred to as special purpose vehicles (SPVs), and I believe they are mainly motivated by the desire to get a full tax deduction on the residential mortgage interest, which is now restricted to a 20% tax credit on the interest paid should the property be owned personally outside of a company.
Apart from the differences in how tax relief is given to companies on mortgage interest and the rates of capital gains tax and stamp duty land tax paid, I believe there is a misunderstanding of the Corporation Tax rates an SPV pays and how an SPV interacts with other associated companies.
A Summary of FY24 Corporation Tax Rates:
- Since April 2023, there have been two Corporation Tax rates
- The main rate of 25% for companies with profits of over £250k
- A lower rate of 19% for small companies with earnings of under £50k
- There is also an unadvertised and somewhat confusing marginal rate of 26.5% for profits between £50k-£250k
The maximum tax saving the 19% lower rate can save a company over the 25% marginal rate is =£50,000@6% = £3,000. This is because when the profits exceed £50,000, the marginal rate claws back the savings the closer the profits get to £250,000.
SPVs are taxed at the main 25%, not the lower 19% Corporation Tax rate
The critical thing to remember is that HMRC considers rental income an investment activity, not a trading activity like dentistry. This means all rental profits and property gains within an SPV company are taxed at the main rate of Corporation Tax, which is 25% for investment activities and not the 19% rate for a small trading company.
SPVs can be associated with other companies you have control over, which increases their Corporation Tax rates
If you also have another company trading as a dental associate or dental practice, unlike an SPV, it can access the small companies 19% Corporation Tax rate.
Having separate dental and SPV companies makes them associated for Corporation Tax purposes, and the associated company tax rules will affect the rate of tax your dental company will pay.
When companies are associated, the tax bands are divided by the number of related companies. The net effect of this is that the maximum saving of £3,000 I quoted earlier is reduced to £1,500 (£3,000/2) for two associated companies and £1,000 (£3,000/3) for three related companies and so on.
Example – Associate Dentist operating through a Ltd company with a related SPV
Dev is an associate dentist with a company making annual profits of £100,000. He asks his accountant to calculate the effect of owning an SPV on the Corporation Tax he is paying.
- Without an SPV it’s £22,750 (22.75%) (£50,000@19%=£9,500+£50,000@26.5%=£13,250)
- With an SPV it’s £24,625 (24.63%) (£25,000@19%=£4,750+£75,000@26.5%=£19,875)
Dev will pay an extra £1,875 (£24,625-£22,750) Corporation Tax with a SPV.
Conclusion
A SPV will be unaffected as its rate will always be 25% regardless of the number of associates.
A dental company making profits of close to £250k or over will not be affected by any SPV companies, as its tax rate will remain at 25%.
A dentist using a company for their dentistry with profits significantly under £250k will, as we say in the tax world, have to crunch the numbers, as the overall tax savings of using an SPV might not be as good as they were hoping for.